Institutional Investment In

TheSwiss and Dutch institutional residential ownership puzzle

Joaquim Montezuma

Universidade Católica Portuguesa

Estrada da Circunvalação

3504-505 Viseu

Portugal

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Abstract:

The allocation of institutional investment to residential property is characterized by large and persistent differences across countries. Switzerland and the Netherlands stand out, with an extraordinarily large institutional residential ownership. Housing is the most important institutional property asset type in Switzerland and the Netherlands, comprising over 52% and 50% of their institutional property portfolios respectively.This paper attempts for the first time to shed light on the high involvement of institutional investors in the residential property market in Switzerland and the Netherlands.In order to understand the reasons underlying this unusual institutional behaviour, a cross-country comparative analysis of institutional investment and housing systems was followed. The implicit hypothesis is that generally the explanation of different institutional allocations to residential property across countries should concentrate explicitly on the similarities and equally on the differences of the institutional investment and housing systems over time and space. The main conclusions are as follows. First, the large institutionalisation of savings comparative to the size of the domestic equity market, together with the fact that institutions tend to invest their funds domestically (home bias) and avoid share investment appear to be important explanatory factors to the relatively important role that property has in Swiss and Dutch institutional portfolios. These investment restrictions on foreign and share investment are, however, not exclusively mandatory. These restrictions are to a great extent self imposed and shaped by valuation rules, accounting rules and taxation. These issues discourage the allocation of those large institutional funds in the share and foreign markets and encourage investment in property markets. Second, the residential property investment characteristics appear to be, to a great extent, moulded by the different forms of government intervention in the housing markets. Tenure neutrality, a well designed "second-generation" rent control and a restrictive planning system have contributed to maintain low vacancy rates and low rent volatility in the private rented sector in Switzerland and the Netherlands. These features have secured a reliable long term stream of cash-flows, which coincide with the financial interests of institutional investors.